What Oil & Gas Companies Should Know about Cost Transparency in Physical Trading

By: James Morgan

Cost Transparency in Physical Trading

In this period of depressed commodity prices, it is more important than ever for oil and gas companies to manage their transportation-related costs.  As margins shrink, the need to stay up to date on the costs of a movement becomes critical.  Many oil and gas companies are taking advantage of geographic arbitrage opportunities to maximize their profits; however, geographic arbitrage strategies typically require waterborne transportation that can take weeks from load to discharge.  These voyages incur significant fees—planned and unplanned–such as demurrage.  For example, a crude VLCC cargo from the Middle East to Asia may be estimated to have $5/bbl profit, but still may result in a loss or break even after all the voyage costs are settled.  Unplanned or underestimated fees can quickly turn the profit of a deal to a loss.  Trading organizations need an integrated view of actual and forecasted costs for the life of a trade to effectively evaluate its profitability and to price future trades more accurately.

Historical Cost Estimates

Analyzing actual versus estimated historical costs at the point of deal price determination enables traders to make better decisions regarding where to send cargoes. These decisions are made based upon the most recent charges per port, route or terminal.  Entering historically validated cost estimates at trade inception will provide a clearer picture as to the true value of a movement.  It is equally important to update the analysis as new voyages and data points arrive. For traders, timely cost analytics highlight routes that have the most significant variances in planned versus actual costs and empower them to adjust their plans. The significant unplanned cost of demurrage may be mitigated through scheduling actions and timely communication with the various involved parties.

Cost Analytics

The combination of contractual rates and actual costs information results in a solid cost analysis.  Due to the difference in trade settlement time and receipt of third party service invoices, the full set of costs for a trade are rarely analyzed as a complete P/L picture.  Trading P/L typically shows a more profitable picture than the accounting view because of the incomplete cost recording in the trading books.  In most companies, secondary cost actuals often come in through the Accounts Payable system and processes (ERP) and not the ETRM system.  The linking of the actual payables to their trades and voyages is difficult but possible with integrated trading and accounting systems, processes and data.

Secondary costs are becoming a focal point for financial improvement throughout the oil and gas industry. Overcome the challenges related to these costs with an integrated system for cost attribution, forecasting and settlement.

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